Fiscal impact of state climate law disputed

A local academic has emerged as the leading source of dark forecasts in
a recession-fueled debate over whether California's war on global
warming will hurt or help its economy.

Sanjay Varshney, dean of the business school at California State
University, Sacramento, predicts dire consequences if the state moves
forward with plans to cut greenhouse gas emissions.

His figures – dismissed by some economists – have been cited by
business groups and politicians calling on the state to delay carrying
out AB 32, the state's landmark climate change law.

In a July paper paid for by the California Small Business Roundtable,
an advocacy group, Varshney reported that trimming emissions would cost
the average household $3,857 a year, kill more than 1.1 million jobs
and cut the state's economic output by nearly 10 percent.

Costs for food, fuel, electricity and housing would all rise, he
predicts, driving a 26 percent drop in discretionary spending, slashing
tax revenues and squeezing small businesses.

Those figures, the result of Varshney's first venture into
environmental policy analysis, have planted him at one of the poles in
the climate change debate.

At the other pole are environmental and green-business groups that
predict AB 32 will make California more innovative and efficient,
driving economic growth and creating jobs.

Varshney's study has been cited by everyone from the San Diego Union
Tribune's editorial board to leading industry advocates in Sacramento.
Last month, Republican Meg Whitman nodded to Varshney's job numbers as
she made postponing AB 32 a key promise in her run for governor.

"We first must get our economy back on track," she wrote in an op-ed in the San Jose Mercury News.

In an interview in his CSUS office, Varshney, 42, a native of India,
said he was honored by the mention. He said he supports fighting
climate change in concept and doesn't have an agenda.

"The idea was certainly not to make this political," he said.

Under AB 32, California must cut its greenhouse-gas emissions back to
1990 levels by 2020. Meeting that target will demand big increases in
energy efficiency, renewable electricity and alternative fuels, among
other changes. The law's regulations begin to take effect in January,
with emissions cuts phased in over the next decade.

The debate over whether those cuts will crush the economy or boost it
has been bubbling since Gov. Arnold Schwarzenegger signed the law in
2006.

Schwarzenegger has consistently pitched a vision of a low-carbon future filled with green jobs and technological innovation.

Studies funded by environmental advocates and foundations have
concluded that efficiency gains and demand for new energy technologies
will deliver an economic boost. A study last year that assumed somewhat
more aggressive emissions cuts than required by AB 32 predicted a
roughly 3 percent boost to the state economy and 403,000 new jobs by
2020. The study was commissioned by Next 10, a Palo Alto-based
nonprofit.

"Every time we're able to save money on fossil fuels, we can spend more
money on in-state goods and services," which are more job-intensive,
said David Roland-Holst, the study's author and an adjunct professor of
economics at the University of California, Berkeley.

AB 32 calls
for the state Air Resources Board to produce a peer-reviewed economic
analysis that would, in theory, settle the issue.

The agency's
first attempt, incorporating Roland-Holst's modeling, found AB 32 would
boost gross state product by about 0.3 percent and save households
about $500 a year.

But outside economists weren't convinced.

After the
report's release last October, reviewers tore into it for understating
AB 32's costs, among other problems. Harvard University economist
Robert Stavins wrote that it was "terribly deficient." The nonpartisan
state Legislative Analyst's Office called the study "inconsistent and
incomplete."

Last December, the Air Resources Board ordered the analysis to be redone. A major revision is due by the end of the year.

Since AB 32 passed, California's unemployment has more than doubled. Those who opposed the bill to begin with have tried to capitalize on its uncertain economic impact to stall implementation.

This spring, Assemblyman Roger Niello, R–Fair Oaks, co-wrote a bill
sponsored by the California Black Chamber of Commerce that would have
suspended AB 32 until the unemployment rate fell to 5.8 percent. The
bill was watered down by amendments and remains in committee.

Varshney's study came out in July, and Whitman has made AB 32 a key
issue in the governor's race. Democratic contender Gavin Newsom, for
his part, has said, "The potential employment upside to AB 32 is
staggering."

Whether Varshney's business-funded study was meant as an attack on AB
32 or not, the air board returned fire this summer. The agency spent
$3,000 to commission a review of the report by UCLA economics professor
Matthew Kahn, released in September.

Last year, Kahn criticized the air board's study. For Varshney's report, though, he had stronger words.

"Varshney generated a tremendously large number with very little
evidence," he said in an interview. "We need to debate the costs and
benefits of AB 32, but this was really from left field."

Varshney and co-author Dennis Tootelian, a colleague at the CSUS
business school, say they were clear in the report that they would
assess only the direct costs of complying with AB 32, not any
corresponding savings – for instance through improved efficiency.
Varshney said the magnitude of those benefits is uncertain, and that
the study, for which they received $54,000, doesn't pretend to be the
last word on the topic.

"Our study is not exhaustive, and neither are any of the ones that exist," he said. "This was our first attempt."

But looking only at the costs of emissions cuts and not the benefits leads to striking inconsistencies.

For instance, Varshney estimates the average annual cost of housing
will rise about 15 percent, or $2,048, under AB 32, based on the extra
expense of making a new home "zero net energy" – drawing no net grid
electricity or natural gas.

But at the same time, the report predicts annual household electricity
and natural gas expenses will rise to $1,723, rather than fall, as
would be expected for a zero net energy home.

While there isn't yet a thorough and independent economic assessment of
AB 32's impact, federal analyses of national proposals to cut
greenhouse emissions offer clues about the costs of such efforts.

In studies conducted during both the Bush and Obama administrations,
the U.S. Environmental Protection Agency, U.S. Department of Energy and
the Congressional Budget Office have assessed proposals to cut
emissions in the range of 17 percent below 2005 levels.

Most of those studies have found a cumulative drag on the economy of
less than 1 percent of GDP over 20 years, with one prominent model
pointing to costs of between 2 and 3 percent.

However, Harvard's Stavins cautioned that those conclusions won't
necessarily apply to AB 32, because both the emissions-cutting targets
and the policies used to achieve them differ somewhat.

Studies of the costs of climate-change policies generally don't include
the expense of coping with the major warming expected if global
emissions aren't cut. In California, these expenses could include costs
related to water shortages, increased wildfires, crop changes and
poorer air quality, among others.

Those costs are uncertain but may be very large. Frank Ackerman, a
Tufts University economist, likened spending now on emissions cuts to
buying insurance against any potential calamity.

"You don't buy fire insurance because you are sure your house will burn
down," he said. "You buy it because you can't be sure it won't burn
down."